What Is a Stablecoin?

Stablecoins are cryptocurrencies with a fixed value that’s usually  pegged to a leading fiat currency like the U.S. dollar, a basket of fiat currencies or exchange-traded commodity such as precious metals. 

‍Stablecoins serve as a much-needed antidote to price volatility in the cryptocurrency markets. 

Stablecoin currencies are collateralized by an underlying asset ,usually the one it digitally represents, in order to deliver the same price stability as fiat currencies.  

A stablecoin such as Tether (USDT) is backed by the U.S. dollar on a 1:1 basis. For every single unit of USDT that's in circulation, $1 is supposed to be set aside and held in reserve by its issuer Tether Ltd, which is controlled by the founders of the crypto exchange Bitfinex.

The number of stablecoins out there has exploded in recent years — as well as the quantity. It's also possible to find crypto assets that are pegged to other fiat currencies such as the euro, and even other crypto assets! 

Broadly speaking, there are 4 types of stablecoins:

• Fiat-collateralized stablecoins, like USDT, USDC, BUSD and many others.
• Commodity-collateralized stablecoins, like DigixGlobal ( a “gold” token).
• Crypto-collateralized stablecoins, such as MakerDAO's Dai token.
• Non-collateralized stablecoins, which rely on a Seigniorage Shares system and algorithm mechanism to keep their peg.

It seems that the possibilities are endless with this new technology. Some stablecoin projects have tied their digital assets to precious metals, or other cryptocurrencies. Projects such as Facebook's failed Libra (now Diem) intended to allow stablecoins to be used as a medium of exchange — backed by a basket of different national currencies. 

Stablecoins are exceedingly easy to buy and are listed on most cryptocurrency exchanges, including Binance and Coinbase. In short, they provide welcome liquidity and safe harbour for crypto investors and are an integral part of the digital assets space. While new stablecoin-focused regulations are always rumored to be incoming, they are still tolerated by authorities worldwide due to their usually high compliance with financial legislative requirements. Stablecoins have almost certainly provided the inspiration and playbook for central bank digital currencies (CBDC).